The IMF's stablecoin paradox, and why it isn't really a paradox at all

An IMF researcher recently wrote about what sounds like a contradiction: domestic adoption of stablecoins could actually boost global demand for the dollar. The piece, titled "The Stablecoin Paradox," was published by Eswar Prasad in the Fund's Finance & Development magazine in late 2025, and the phrase has since echoed through policy circles.

It reads like a paradox because we've been told for years that stablecoins represent a threat to traditional currency - that they will hollow out banking, undermine monetary policy, and create a shadow financial system outside official control. If that were the whole story, then every country that embraced stablecoins would be edging away from the dollar, not toward it.

But the paradox dissolves once you look at what stablecoins actually are and how they work. They are not dollar alternatives. They are dollar export infrastructure.

What the mechanism is

The simplest way to understand it is through the balance sheet. When Tether or Circle issues a dollar-pegged stablecoin, they must hold dollar-denominated reserves to back it. Today, those reserves are overwhelmingly short-term U.S. Treasury securities and, to a lesser extent, cash and repo.

So every new dollar of stablecoin supply creates roughly a dollar of new demand for U.S. government debt. The Richmond Federal Reserve laid this out clearly in a March 2026 brief: reserve-backed stablecoins increase Treasury demand, while crypto-backed ones reduce it. Because the largest stablecoins by far - USDT at a market cap of about $183 billion and USDC at roughly $72 billion - are reserve-backed, the net effect is a structural bid for U.S. safe assets.

As of November 2025, according to a recent LSE Business Review analysis, 99% of all stablecoins in circulation were dollar-denominated. Tether and Circle together controlled about 84% of the market. The stablecoin market hit a peak near $321 billion in April 2026. Even after a quarterly contraction brought total supply closer to $300 billion by July, the scale of Treasury exposure implied by that number is substantial.

What matters for the reader is that this isn't a speculative relationship. It's mechanical. If the stablecoin sector grows, Treasury demand grows with it - unless the backing shifts away from dollar assets, which there is no current evidence of.

Where the money actually moves

The flow direction is what makes the IMF's point concrete. Fund research shows that North America is a net exporter of stablecoins to the rest of the world. Latin America and the Caribbean, and Africa and the Middle East, receive more dollar-backed tokens than they send. Relative to GDP, stablecoin flows in those regions reach roughly 7–8% - a scale that traditional cross-border dollar flows don't match.

Nigeria is the clearest case. The IMF published a specific country report on stablecoins there in June 2026, noting that the country received about $59 billion in crypto-asset inflows between mid-2023 and mid-2024 and accounts for roughly 60% of stablecoin inflows into sub-Saharan Africa since 2019. The Fund warned that this usage could weaken demand for the naira and undermine monetary policy transmission - which is another way of saying that stablecoins are doing dollarization at digital speed.

The IMF also found that when the dollar strengthens, stablecoin outflows from North America increase. As local currencies weaken in emerging markets, households and firms turn to dollar-backed digital assets as an alternative. The mechanism is the same as traditional dollarization, but the plumbing is different: it bypasses correspondent banking, capital controls, and the traditional foreign-exchange market.

Why some countries are building the system that replaces their own currency

This is where the real tension lives. Some governments, particularly in emerging markets, have moved to regulate or even encourage domestic stablecoin activity because they see the benefits: cheaper remittances, faster cross-border payments, access to financial infrastructure that their own banking systems can't provide efficiently. The IMF acknowledges these benefits. It also acknowledges that the same infrastructure that makes payments cheaper is the infrastructure that makes dollarization harder to stop.

Countries face a choice they didn't have to face in the physical-cash era. You can restrict stablecoin use and lose access to cheaper cross-border rails, or you can embrace it and accelerate currency substitution. Neither option is clean.

The Fund's advice to countries like Nigeria is to "safeguard monetary stability" and "strengthen oversight" - essentially, make your domestic currency so credible that people don't need an alternative, while regulating the digital channels anyway. It's reasonable advice in the abstract. It's much harder when inflation is elevated, FX access is constrained, and the domestic banking system can't compete on cost or convenience.

The European contrast

It's worth looking across the Atlantic to see how a different institutional setup changes the calculus. The EU's MiCA regulation, now in force, divides stablecoins into e-money tokens pegged to a single currency and asset-referenced tokens backed by a basket. The framework sets reserve segregation, custody, and reporting requirements - stricter than what exists in the U.S., where the GENIUS Act opened a broader door for private issuers.

The European Commission and European Central Bank have been explicit about their concern: dollar-denominated stablecoins expanding beyond crypto markets strengthen demand for dollar assets, and Europe needs its own infrastructure to avoid ceding monetary sovereignty. The ECB's wholesale digital euro project is, in part, a response to this same dynamic. It's not about retail payments. It's about settlement architecture - who controls the rails when tokenized money becomes a larger share of global finance.

Europe is moving slowly, and its cautious architecture may produce a cleaner migration path for institutional tokenized settlement. But it's also true that Europe's caution means dollar stablecoins continue to set the standard while the euro catches up.

What this changes

The IMF's "paradox" is really a reminder that money rails are political infrastructure. Dollar-backed stablecoins are not a challenge to dollar dominance; they are its latest distribution channel. Stablecoin transaction volume - excluding bot-driven and high-frequency trading - grew from about $565 billion in 2020 to roughly $11 trillion in 2025, according to Visa's analytics dashboard. In five years, stablecoin transactions went from 5% of Visa's network scale to 65%.

That number doesn't mean stablecoins are replacing credit cards. It means that the digital dollar ecosystem has become a major layer of global payment activity, and almost all of it flows through U.S. Treasury-backed reserves.

The structural implication is that the countries and institutions building domestic stablecoin infrastructure today may be strengthening the very currency system they hope to diversify away from - not out of malice, but because the default architecture routes them back to Washington. Dollar-backed stablecoins are the path of least resistance for any jurisdiction that wants digital payments without building its own reserve system from scratch.

What would weaken this read? A material shift toward crypto-backed or multi-currency stablecoins at scale, or a wholesale CBDC or tokenized deposit system that becomes the default rails for cross-border settlement. Neither is imminent. The crypto-backed stablecoin category remains small, and Europe's wholesale digital euro is still in its exploratory phase.

The more useful question going forward is which countries and regions will try to build an alternative - and whether the network effects of the current dollar-stablecoin system make that effort moot before it gets off the ground.